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Cheap Trade Credit and Competition in Downstream Markets

Author

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  • Mariassunta Giannetti

    ()

  • Nicolas Serrano-Velarde

    ()

  • Emanuele Tarantino

    ()

Abstract

Using a unique dataset with information on 20 million inter-firm transactions, we provide evidence that suppliers offer cheap trade credit to ease competition in downstream markets. We show theoretically that trade credit allows suppliers to transfer surplus to high-bargaining-power customers while preserving sales to other buyers. Suppliers optimally choose a trade credit limit up to which customers can purchase on account. This contractual feature allows suppliers to target infra-marginal units and to leave unaffected customers' marginal costs. Empirically, we find that suppliers grant trade credit to high-bargaining-power customers only when they fear the cannibalization of sales to other low-bargaining-power customers. Exploiting a law that lowered the cost of offering trade credit, we show that higher provision of trade credit to high-bargaining-power customers leads to an expansion of the suppliers' customer base and higher growth of sales to low-bargaining-power customers.

Suggested Citation

  • Mariassunta Giannetti & Nicolas Serrano-Velarde & Emanuele Tarantino, 2018. "Cheap Trade Credit and Competition in Downstream Markets," CRC TR 224 Discussion Paper Series crctr224_2018_062, University of Bonn and University of Mannheim, Germany.
  • Handle: RePEc:bon:boncrc:crctr224_2018_062
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    File URL: https://www.crctr224.de/en/research-output/discussion-papers/discussion-papers-2018#DP62
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    References listed on IDEAS

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    Cited by:

    1. Bryan Hardy & Felipe Saffie, 2019. "From carry trades to trade credit: financial intermediation by non-financial corporations," BIS Working Papers 773, Bank for International Settlements.

    More about this item

    Keywords

    Trade credit; competition; input prices; supply chains;

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • D2 - Microeconomics - - Production and Organizations
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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